Fitbit's Charge 2 fitness wearables

Fitbit's upgraded Charge 2 fitness wearables failed to stimulate upgrades during the holidays. Image source: Fitbit.

What happened

Shares of Fitbit (NYSE:FIT) tumbled on Monday after the fitness wearables company announced disappointing holiday-quarter results. Fitbit fell well short of its previous sales guidance, announced a reorganization that will see its workforce slashed, and predicted that sales in 2017 would suffer a steep decline. The stock was down about 12% at 11 a.m. EST.

So what

Fitbit sold 6.5 million devices during the fourth quarter, down from 8.2 million during the fourth quarter of 2015. Revenue is now expected to come in between $572 million and $580 million, well below the company's previous guidance range of $725 million to $750 million. Fitbit produced $711 million of revenue during the fourth quarter of 2015.

Fitbit expects a non-GAAP (generally accepted accounting principles) net loss between $0.51 and $0.56 per share for the fourth quarter. Previously, the company had guided for a profit between $0.14 and $0.18 per share. In an effort to reduce costs, Fitbit announced a reorganization with the goal of slashing its annual operating expenses by $200 million. Part of the plan involves laying off 110 employees, or roughly 6% of its workforce.

Fitbit CEO James Park believes that the company's problems are temporary:

To address this reduction in growth and what we believe is a temporary slowdown and transition period, we are taking clear steps to reduce operating costs. Looking forward, we believe Fitbit is in a unique position to stimulate new areas of demand by leveraging the data we collect to deliver a more personalized experience while developing upgraded versions of existing products and launching additional products to expand into new categories.

Now what

Despite Park's statement, Fitbit expects sales to drop considerably during 2017. The company guided for revenue between $1.5 billion and $1.7 billion, well below the $2.17 billion of revenue it now expects to report for 2016. This guidance also represents a decline from the $1.86 billion of revenue reported for 2015.

Along with lower revenue, Fitbit expects to produce a non-GAAP net loss between $0.22 and $0.44 per share this year. Free cash flow is also expected to turn negative, a loss between $50 million and $100 million. Park and CTO Eric Friedman, Fitbit's two co-founders, plan to reduce their 2017 salaries to $1 to reflect the company's struggles.

Fitbit's results now confirm that the company had major trouble convincing its existing installed base to upgrade to new models; sales fell off a cliff despite the company launching updates to its popular Charge and Flex products prior to the holidays. Fitbit will need to come up with something truly innovative in 2017 to drive revenue higher once again. Amid layoffs and cost cuts, the odds don't look good.